Economics

Saving

Too thin a cushion

AMERICANS probably aren’t saving enough. Savings come in handy in many circumstances: when buying a home, paying for a child’s education, retiring, or in cases of unexpected need. Yet despite aging populations and rising educational costs, America's savings rate has been falling. The figure below shows the saving rate (for January) the last 44 years:

The drop began in the 1980s, perhaps because the Great Moderation made people less fearful of economic uncertainty. When uncertainty returned during the financial crisis, and as credit conditions tightened, the saving rate shot up. Wage stagnation may also play a role; people expected better living standards and cut back on saving to raise consumption. The saving rate fell again this past January. That may reflect greater economic optimism or the return of the full payroll tax, which lowered take-home pay. Rather than decrease consumption people may have saved less.

The falling saving rate is a worrying trend. A low stock of savings increases vulnerability to economic shocks. Expansionary economic policy has helped invigorate the economy by boosting consumption, through low interest rates. People save more during recessions—and more then businesses care to invest, leading to underutilised resources—so boosting consumption increases aggregate demand and jumps starts recovery. With saving rates already so close to zero, the government might have had better luck boosting the economy through its own dissaving, via deficit-funded stimulus, than through trying to encourage such behaviour in strapped households. And over the longer run, policies that discourage saving look foolish at current saving rates.

What’s interesting about the long term trend is that it coincides with the period when private pension accounts became more popular (the figure above counts 401(k) programmes and contributions to defined-benefit plans). Since 2006 firms could auto-enroll their employees: they could automatically put some of their wages in the accounts, unless explicitly told otherwise. This increased participation in these accounts. According to the Wall Street Journal, contributions to 401(k) plans have increased 13% since 2006.

There’s mixed evidence on whether pension accounts create new saving: whether or not people who have accounts save more or simply save less using other sources. For for active savers, people who normally save, access or auto-enrolment doesn’t change overall saving. But for passive savers, people who normally wouldn’t save much, auto-enrolment creates new saving that normally wouldn’t have existed. Passive savers tend to be younger and have lower incomes than active savers.

And this is the population that isn’t saving enough to begin with. They should be saving more for distant retirement and for precautionary reasons. The figure below shows average amount median income earners had in liquid assets (savings accounts, CDs, and savings bonds) and retirement accounts since 1989 (in 2010 dollars) from the 2010 Survey of Consumer Finance:

People now have much more of their wealth in retirement accounts. That’s not surprising. Private pension accounts have become more popular and the population has aged. People should have more in their retirement account than in liquid savings. It takes a lot more money to finance retirement, decades of no income, than it does to finance your typical precautionary event. Retirement accounts generally earn a higher yield (because they are typically invested in riskier securities). The decline in liquid savings in worrying, however. It suggests people are less prepared for the shocks life throws at them. Thismay be due to many factors: slow income growth or that the low return on low-risk saving instruments, which reduces the incentive to save.

Interestingly, the lower levels of liquid saving may explain why there’s been an increase in the number of people taking out loans against their 401(k) plans or paying the penalty to draw on them early. Meanwhile, the average retirement account balance for people between 55 and 64 is $291,000, which will only provide about $12,000 a year in inflation-indexed income. Taking out a loan means a saver misses out on valuable accruals. But without another source of saving taking a loan against retirement funds maybe be a better financial decision than default on other obligations.

To me the sudden increase in 401(k) loans is less about myopia and more a symptom of under-saving. As people save less to liquid assets and are being defaulted into a 401(k) plan; it’s not surprising they turn to their main source of saving when times get rough. Rather than make savings more illiquid, we need to do more to make all forms of saving more attractive.

"Is it necessarily Keynesian 101 that gov't should spend?"
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Yes, and during particularly strong economic downturns.
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"If you have to have a budget deficit I would think an equivalent if not better Keynsian policy is for the government to cut taxes."
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The returns on dollars spent, whether on a road or on a tax cut, are not the same. The returns on road building are generally much higher.
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"It might not be as opportune for you to spend as it is for someone else, therefore it makes sense that that person spends and therefore you should save and give your money to them."
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I agree with everything up until the "give your money to them" part. However, at some point this reaches economic metaphysics, which I'm not very good at.
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For example, person A spends their money on lap dances, and person B on The Christian Children's Fund. Which is better? I think it depends on the person benefiting.
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For the lap dancer, the spending by person A is better, unless he/she has a soft spot for poor children, at which point he/she might donate part of his/her earnings to the Christian Children's Fund.

I think I probably agree with you. My comment was meant more as an observation of how individuals in society appear to be working at cross-purposes to each other.
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That is, it's probably best for individuals that they save more. However, firms are doing their utmost to get consumers and clients to spend more, and save less.
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And, spending more leads to more spending, which helps build the economy over time.
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I think the best individual position to be in may be as one of those who owns a firm - through stock ownership, proprietary ownership, etc. - and yet saves to his/her utmost, and uses the savings to purchase more ownership over time, with enough savings on the side to have a cushion through the cycles.
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So, one saves individually, and benefits from others' lack of savings. Now, whether this is moral and/or ethical is an interesting question, however...

The US economic system reminds me of how computer mapping of gazelles running from lions in a zig-zag pattern suggests that gazelle behavior is less about avoiding the lions, and more about placing unhealthy gazelles at the edge of the herd to be sacrificed to the lions, and to the long-run benefit of the herd.
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So, at some point, there are certain things the US economic system is going to do in the long run, and modifying behavior to avoid being placed at a difficult position is the best individual choice.

I think the smarter way to play the game is to save, and to invest the savings in those firms which are most efficient at capturing disposal income cash flows.
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This may include nursing homes as you cited above, plus companies which are key to many of our lives, e.a., energy firms (Exxon, etc.) and those with strong ROEs, like Apple.

Certainly there comes a point of diminishing returns on infrastructure investments. And we are probably at (or past!) that point on some kinds. But that is a long way from saying that there are not still worthwhile infrastructure investments that could be made.
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The challenge, of course, is to get spending directed to those, rather than to whatever would be the prettiest edifice for a politician to get his name on. Heck, we would be significantly better off if we directed all of our infrastructure spending for a couple of years to catching up on "deferred maintenance." Unfortunately, there is no way for a politician to get his name posted on maintenance....

"Last I recall, we live in a constitutional republic."
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A constitutional republic is a form of democracy.
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"Democracy is just another word for tyranney by the mob."
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What form of gov't would you prefer other than a democracy?

"I distrust the line because I think it's used as excuse for government to spend when people are tightening up."
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Well, I think it's Keynesian 101 that gov't should spend when the economy has tanked, and then reign-in spending when the consumer has kicked back in.
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To me it seems like intelligent policy, although I understand that not everyone is good with it, given in part that it appears to take away personal incentives to save and take responsibility for one's own life.
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Then again, not saving helps the economy, which brings us back to square one...

I have a suggestion. Try to coordinate your advice that people need to save more for retirement with the public policy idea that government old age benefits should be means tested.

Those advocating the policy, both Democrats and Republicans, do not use lifetime income as the measure of "means." They base it on how much is left after lifetime spending. Those who lived large will get public benefits in old age to provide a standard of living equal to those who scrimped and saved, according to the plan.

Try to coordinate the fall in the U.S. savings rate with public policies of the past. The elimination of tax deductions for borrowing (except mortgages) and the creation of all kinds of tax subsidies for saving (IRAs, 401Ks, 529s) starting in the early 1980s. All intended to increase the savings rate. Clearly this did not work, except to redistribute income upward.

Culture matters more. America's cultural leaders, in the advertizing industry, continually work to upsize the amoung of consumer buying that must occur for a decent Americna life to be lived. With politicians joining in, because it is good for the economy, and the media joining in, because "news" stories on spending attract advertizers.

What if you already have decent roads? Isn't there a level of investment in roads where further investment does not gain the same return? I love concrete, you love concrete, heck, the Romans from 2000 years ago loved concrete, but you agree that eventually you run out of things to pour concrete on? Further, most of the people who know how to build roads are already building roads, unless you plan on retraining lawyers or Economist journalists to build roads.

The value in a road is not so much the road but rather the goods that travel over them. In our society, the roads are generally public roads built with political montivations in mind. The goods are generally private sector goods produced with economical motivations in mind. I'm not discounting the value of roads but I'm emphasizing that when the economy slows, you want enhanced focus on making economic decisions, not political decisions.

"For this reason people are willing to spend a fortune to get their kids into Harvard or Yale- not to learn anything, but to make connections with people who have parents in government..."
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Do you know anyone who has actually done this? Do government workers generally make the kinds of salaries that can pay for a Harvard tuition?
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With all apologies, it sounds a bit like a Rush Limbough conspiracy theory...

I hope you aren't a young worker. Those who believed such things in the early 1980s ended up much worse off.

"There's far more income in middle age to start saving."

If you want a house, you have to start saving for a downpayment first. If you are married and have a child, one of you might end up out of the workforce, or you both may work part time (as my wife and I did) reducing your income for a time. Then you need to save for your children's education.

Meanwhile, if you are lucky your pay will plateau. If you are unlucky you will work in an sector where pay temporarily soars, upsize your lifestyle like your peers, and then see your pay plunge and never recover its former highs. (Oil in the early 1980s, Wall Street in the 1980s, dot.coms in the 1990s, Wall Street again in the 2000s, real estate and mortage brokers in the mid-2000s, dot.coms again since 2007, oil and gas again today). They should have banked the windfall rather than assuming it was a permanent consequence of their own genius, but they never do.

"That distant and more privileged retirement?"

For today's young workers retirement will indeed be distant, but will not be priviledge, even if they do save. Unless, as some evidence suggests, life expectancy begins to fall.

"It might be more accurate to say that spending more now means spending less later."
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I believe this may be true individually - although as others have pointed out in this comments section, having less at times allows certain gov't programs to kick in which help subsidize individual college tuition, medical care, etc.
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However, in the aggregate, I believe spending leads to more spending via the money multiplier effect.

"If you haven't noticed, the government is running trillion dollar deficits and needs cash..."
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Given that it's inflating away the deficit at 2% a year, it may not need the cash.
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Theoretically anyway, within 36 years any gov't debt incurred today will have been inflated away to zero.

Exactly. Who among us can wait for the luxury of Medicaid-provided nursing care? Why even earn income if some of it will be taxed? Why not just assume that your kids will get into the best possible school with full financial aid?

Right about the cash - there's so much of it out-'n-about now that there's literally no place to put it. Using the QE$ to fund Treasuries dedicated to infrastructure would have been such a nice, elegant solution - for everyone but the wise guys.